Label Industry Update

DONE: You are absolutely correct; we saw material supplies starting to tighten up over a year and a half ago. Most raw material suppliers predicted things would improve in early 2021. Well, that certainly didn’t happen.  Throughout 2021, raw material supply availability continued to get worse. Most of our suppliers responded by enacting allocations on even the most basic stocks such as Thermal Transfer and Direct Thermal paper.  We have all heard the issues related to storms in the gulf states and paper mills pivoting away from printing papers, but that is only part of the story. Here we are in Q2 of 2022 and there is no end in sight.  Certainly, the UPM Finland paper plant strike has exasperated the situation and it is still not resolved. This strike is important because that plant supplies over 25% of liner stock for the U.S. market, in addition to a large portion of semi-gloss face sheet.  At this point, every one of our raw material suppliers is stating that conditions won’t get any better throughout 2022. The industry continues to face unprecedented demand, while simultaneously dealing with supply chain problems.

DONE: To answer this question, you need to take a more holistic view of our business environment. The economy has really taken off as we move from the pandemic to an endemic environment. Not only has e-commerce continued to grow rapidly, but general business has rebounded as well. This has led to extremely high demand for product label. While label manufacturers are facing a supply issue, the high demand has also created a capacity issue. When you put it all together, you get a perfect storm where demand is outstripping available capacity. The raw material providers just don’t have enough capacity to handle more volume. They are already running at maximum capacity on their coating lines, and increasing capacity takes time. It will take months, if not years for them to invest in and deploy new coating assets, which cost millions of dollars each. Then there is also the need for physical space to house the new equipment and additional people to run the new production lines.

DONE: Very hard. I have been in the printing business for 40 years. Outside of a short time in the early 1980’s when paper for stock computer forms had a significant shortage and allocations occurred, I have never seen anything like the situation we are in right now. It is generational.  Almost every one of our suppliers (who by-the-way, are all major companies in label lamination) have initiated allocations on material. Under these allocations, we can only purchase, at most, what we purchased a year ago, and none of the suppliers are accepting new volume. In other words, we can’t buy enough material to meet current demand from existing suppliers, and no raw material companies even want to take on more new volume. They are all slammed with business and are trying to get their arms around their blossoming backlogs.

I am receiving calls weekly for companies to source label material.  Some of these requests have been significant, like a truckload of labels every three months.  It kills me to turn away business.  We are doing out best to mitigate the situation and we try to help everyone who calls.  As I tell everyone, it does not matter what you produce or how important your product is to industry, if you do not have the proper label, you can’t ship.  It your product does not ship, you can’t stay in business.  It is that simple.

DONE:Well, if you mean are we speaking with every raw material supplier we know, both domestically and internationally, the answer is yes. Material sourcing and acquisition has become a full-time activity for our strategic sourcing and executive teams.  The good news is that we enjoy very solid relationships with our suppliers and spread our volume around to ensure we are not captive to any one company. Also, we pay our bills in a timely manner and work to partner with suppliers so we get favored status. This has allowed us to take care of our customers in a manner that is as good as it gets in the market right now. We are focused on getting materials in and getting production out the door every single day.  The work load has increased 3X on every label order because of the supply chain challenges.  Every day is a grind, but we are committed to our customers in keeping them up and running and we know this to shall pass.

Done: Great question. We have made some tough decisions. We are focused on taking care of our existing customer base, which has supported us for many years. We are turning down opportunities from prospects as we feel a fiduciary responsibility to our current customers. I can’t tell you how many companies have reached out to us and said they have large quantities of work they can send our way if we can just meet their needs. Our answer to those opportunities has been “Thanks for thinking of us, but with the tight supply, we are focused on our existing business right now.”  It has gotten so tight from a material supply standpoint that we are prioritizing the production of custom labels over stock products. We believe this is important because our customers rely on us to meet those custom needs.  As for stock label product, we have been forced to limit ordering quantities and to focus on the higher volume stock items. Right now, we can’t be all things to all people. It just isn’t possible. So we made a conscious decision to target the stock products that are needed most.

DONE: You are correct. In 2021, we saw quarterly cost increases for raw materials that averaged 7% – 9% each quarter. And that was in addition to cost increases that occurred throughout the year for everything else we purchase such as: cores, cartons, plastic bags, shrink and stretch wrap, pallets, and ink. Plus, as we all know, freight and labor costs continue to escalate.  Now, in 2022, we have seen a continuation of the cost increases for raw materials, with 9% -11% increases in both Q1 and Q2. Think about it; we are experiencing rapid, on-going inflation, and at the same time, seeing a significant deterioration in service with two to four month lead times, allocations, and unreliable deliveries.  It is a common occurrence for us to expect material to arrive today that we have waited over ten weeks for, only to receive a notice that we won’t see the material for another month.  Every major label coater and laminator is telling us to expect prices to go up each quarter in 2022 with no lead time relief in sight. It is a very difficult situation for us and our customers.  In my 35 years in the label business, I have never seen price increases like I have seen these past two years.  Like I said before, it is the perfect storm that is causing this.

DONE: Again, we have a perfect storm. Here is what is happening to all label converters right now. We order material for jobs; we won’t see it for many weeks. In the meantime, raw material companies announce a price increase, which takes effect on all shipments within the next month.  That means our costs for material will go up well after we cut the purchase orders. And, with quarterly cost increases, there are many orders that won’t ship until two price increases have taken effect.  What used to be an orderly process is now completely chaotic. We quote jobs with the best knowledge we have, but the disclaimer is that all orders are subject to material availability and potential material cost increases. None of us like running our businesses this way, but it is our reality today.  We are especially cognizant of how difficult this makes things for our customers. Everyone in this market needs to ensure their customers understand that supplies are very tight and costs are not firm until raw materials come to the converter.  That’s why we have been staying very communicative with our customers. We recognize this is a partnership and it is our duty to keep them updated, no matter if the news is good or bad.

DONE: The best things we can do are:

• Keep you up to date regarding market conditions and issues. We need to repeat this over and over again so companies really hear what you are saying.
• Get your orders in early and be prepared for delays and shortages. There is no bullet-proof answer. We try best to get ahead of your customers’ needs knowing that you are not going to get everything you want when you want it.  I do not want to sound like a used car salesman, but if you can plan 3-6 months ahead for you labeling needs, that seems to be working the best.
• Be open to alternatives. I wish this was as simple as it sounds, as all materials are in short supply. Right now, the coating and laminating companies are focused on trying to keep up with core material and adhesive requirements. There are some specialty products where you could wait months and months for stock. Working with our sale and estimating team, we can explore less painful alternative options. They may not be perfect, but they will allow us to keep our customers supplied with label stock.

My biggest fear is that label materials become scarce or not available.  Second, that prices continue to rise causing end users get creative, finding other options to labels. Let’s face it, we all need to run our businesses and companies will pivot away from problem areas, finding new ways to mark products, identify inventory, track production, or ship goods other than applying a label.  Hopefully, with steps we are talking with our suppliers and customers, we can hold the line.  This is a very challenging time to be in the label business and I sure you feel the same about your business as well.

DONE: For the past two years, PaladinID has been on a mission to add capacity, both from a supplier and a personnel standpoint.  We have positioned ourselves to have redundancy in our manufacturing processes.  Meaning, having multiple plants in different locations around the country to produce our labels.  If weather or label shortages occur in an area of the country, we can pivot and move orders to another facility all the while maintaining our quality of work and timely deliveries.

Good things happening and this situation has caused us to look outside the box. We have been highly focused the past two years on ensuring we have everything we need to produce more product. We agree the supply chain will eventually correct itself and are in position to support our customers once it does happen – so they can benefit from the change.  We are operating under the premise that the world is fundamentally different today than two years ago; we are building our company to meet the needs and challenges of the new normal.